Where are the financial markets going?

Columnists

Where are the financial markets going?


Stock traders of the Nairobi Stock Exchange. PHOTO/DIANA NGILA

Global financial markets have been extremely volatile this year, with equities suffering from the shockwaves of Covid-19, supply chain bottlenecks and central bank monetary policy tightening.

Global consumers had to endure higher prices as inflation eroded household budgets and energy costs soared.

As inflation remained high, central banks responded by raising interest rates, thereby increasing the cost of credit. The year 2022 is coming to an end and investors are looking for the light at the end of the tunnel.

Where are the global financial markets headed?

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The first factor to consider is the price of oil. US oil prices have fallen 33% from a high of $126 a barrel in March to $84 currently. Brent oil also peaked at $131 in March before falling 30% to the current level of $90.

This is a good trend and an indication that energy prices could fall further heading into 2023. Kenya stands to benefit from lower energy prices, which could have a substantial effect on inflation and the cost of living.

The technology sector suffered the most from this bear market.

The Nasdaq 100 Index, a US-based index that broadly tracks tech companies, is down 29% year-to-date, indicating a sell-off in tech stocks as investors focus on stocks energy and other inflation-resistant assets.

This has created a market for cheap tech stocks, and investors are wondering when they should buy them again.

Investors watch changes in central bank policy, energy prices, economic growth and consumer purchasing power. When these factors indicate a positive change, the environment can become favorable to consider a risky mode.

Kenya’s NSE 20 stock market index peaked in February 2015 at Sh5,500 and has been in a bear market ever since. It has fallen over 70% and is now trading at Sh1,658.

In September, the Central Bank of Kenya (CBK) raised interest rates by 75 basis points to 8.25%, further tightening liquidity in response to inflation of 9.59%.

The new administration seems optimistic and if some fundamental changes are implemented, the NSE 20 could enter a long-awaited bull market.

Since the pandemic, China, Kenya’s largest trading partner, has experienced a significant economic downturn due to its zero-Covid policy. It has faced its own set of economic challenges in 2021, including a weakening real estate market.

Recent policy changes, such as the elimination of the zero-Covid policy last week, are expected to boost economic activity and encourage investment in Chinese industry.

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China’s monetary policy is also ultra-loose, which should boost growth.

As a result, Kenyans and other trading partners who get the majority of their imports from China should see low-priced Chinese imports. Lower energy prices for manufacturers, combined with cheap imports, should lower inflation and potentially reverse central bank policy.

Global consumers, on the other hand, should have more purchasing power in 2023 and aggregate demand should start to recover. Right now, it’s clear that Covid is behind us and there are lessons to be learned, at least from an investment perspective.

Since March 2020, people have started rethinking their finances and investment strategies as financial market technologies have made the environment virtually borderless.

Kenyans can easily buy global stocks through licensed brokers and speculate in globally traded commodities such as coffee, cotton and oil. So if you want to invest in stocks, why not go for the best in the world?

The current war in Ukraine and the sanctions in force against Russia by the West have disrupted food production and distribution, creating a global food crisis that has hit the global south the hardest.

As countries seek to secure their food supply, investment in food production and distribution companies has increased significantly. Therefore, investors should consider potential opportunities in companies that produce agricultural inputs, agricultural equipment, and food processing and distribution.

Major investors such as Warren Buffet are currently investing heavily in essential service companies such as waste management, healthcare, telecommunications and banking. In theory, even if economic production slows, people will continue to pay for health care, waste management and other essential services.

This gives companies that provide such services the ability to reprice their services while maintaining their profit margins without significantly reducing demand.

In a healthy economy, private sector investment should outperform 10-year bond yields. In Kenya, however, bonds are yielding more than 12% a year, while stocks, money market funds and Sacco yields are lagging behind.

This creates an environment in which investors prefer bonds to domestic investments. So where should you invest to get higher returns than bonds?

Taking inspiration from the current COP27 meeting in Egypt, world leaders are pushing to accelerate environmental, social and governance (ESG) policies to tackle climate change and achieve net zero emissions. This resulted in the creation of a fund dedicated to the production of green energy.

As we approach 2023, I expect companies specializing in the generation and distribution of green energy to benefit from this funding and investors should consider the opportunities available.

The author is Principal Markets Analyst, FXPesa.